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Investment Monthly

Bonds are back
03 November 2023
    Download the full reportPDF, 4.36MB

    Key takeaways

    • Risk assets remain under pressure as investors digest central bank signals of a ‘higher for longer’ interest rate regime. A higher cost of capital and recession risk poses a material challenge for current pricing
    • We take a defensive positioning in global stocks – favouring quality and yield. We see selective opportunities in Asia, including Japan (our preferred DM allocation) and India (strong earnings prospects)
    • In fixed income, we think ‘bonds are back’ – yields are higher, and term premiums are positive again. A quality and selective credit strategy can offer a good return profile to investors now

    Macro Outlook

    • US economic activity is holding up, although underlying demand is weakening and a slew of forward-looking indicators signal a significant deterioration in the jobs market. Higher interest rates are yet to fully feed through into the real economy
    • Outside of the US, economic conditions look worse. European PMIs are already in recessionary territory, while China’s economy continues to face challenges stemming from a stuttering property market and related confidence effects
    • Our central scenario remains that the US and European economies will fall into recession in 2024 amid restrictive monetary policy and a raft of headwinds facing consumers, including the exhaustion of pandemic excess savings

    Policy Outlook

    • Our central scenario assumes that the Fed, ECB and BoE are done with policy tightening. Policymakers have signalled a preference for a “table mountain” rate profile and financial conditions have recently tightened
    • However, we believe central bankers will then have to ease policy by more than markets currently expect during 2024, as recessions bite
    • Further monetary easing remains on the table in China, while more fiscal support is needed in order to sustain economic recovery. Meanwhile the Bank of Japan still looks likely to dismantle its yield curve control framework